China’s land auction error weakens Xi Jinping’s inequality movement

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China Business and Finance Update

After the central government’s new regulations failed to control prices, China’s largest cities suspended land auctions, which caused a setback to President Xi Jinping’s campaign to reduce social inequality.

The promulgation of these rules is Xi Jinping’s efforts to promote “Common prosperity“By cracking down on the high housing prices borne by middle-class families, it aims to reduce demand and out-of-control housing prices. But they have the opposite effect, pushing up the hot real estate costs.

Regulations formulated by the Ministry of Natural Resources in February stipulate that 22 cities including Beijing and Shanghai should sell more land this year than the average land sold from 2016 to 2020. The municipality will have to sell the land in 2021 in three large-scale auctions.

Authorities believe that the previous practice of holding dozens of auctions in these cities has only aroused the appetite of developers.Officials believe that real estate developers who missed one auction may refocus on the next auction, leading to a series of high bids and ultimately higher apartments. price.

The influential director of Chinese Bo Yi under the pseudonym Tu Chairman pointed out that the government is paying more and more attention to the “wider social and economic impact of high housing prices.”

The ministry stated in an internal memo seen by the Financial Times that reducing the auction process to three will give the impression of “sufficient supply” for each auction and “return to normal the overheated municipal real estate market” “. The memo added that this shift will also make it difficult for developers to raise cash to purchase multiple plots.

But it did not proceed as expected, and the auctions originally scheduled for July and August were suspended. Government consultants warned that unless the annual real estate supply is increased, the behavior of developers will not change.

“Resources are still in short supply,” said a person who consulted the Ministry of Natural Resources and requested anonymity. “Developers will compete for every available plot.

“The authorities are too idealistic. They did not expect that market forces would go against their wishes.”

According to statistics from local housing management bureaus, among the 22 cities undergoing land sales reforms, the average transaction price rose to 9,591 yuan (US$1,485) per square meter in the first half of the year, an increase of 38.3% over the previous year. .

The first large-scale auction was held from April to June. In Chongqing, China’s most populous city, China Merchants Bank, a subsidiary of China Merchants Bank, purchased a plot in the center of the city at a price 130% above the asking price. The city paid a record 49% of premiums the previous year.

An executive from China Merchants, who asked not to be named, said that the group is willing to pay a high premium because “we are in a land reserve race to burn money.”

Some cities are beginning to set upper limits on bids, which are determined by lottery, because many developers are willing to pay the highest price allowed.

In April this year, the upper limit of the bid for a piece of land in central Guangzhou was 50% higher than the asking price. In order to increase their chances of winning, large developers have created many shell companies to provide them with additional tickets to the lottery. About 300 entities participated in the auction, but they only represented about 30 developers.

Companies owned by local governments are also involved. An executive of Yuexiu Enterprise, a leading developer controlled by the Guangzhou Municipal Government, said: “If you don’t have a dozen or more shell companies to join the competition, you can’t win the auction.”

According to the minutes of the meeting seen by the Financial Times, at an internal meeting last month, the Ministry of Natural Resources tried to curb the surge of shell companies by requiring every company to provide proof of funds. It also instructed local governments to set their bid limit at 15% higher than the asking price.

However, the Ministry’s consultants doubted the effectiveness of the latest measures. Since most of the local government’s fiscal revenue comes from land sales, they may be inclined to simply raise the asking price.

“The risk is too great,” he said. “The central government cannot expect to control everything.”

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